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14th of November 2018


UBS haunted by its past in US and French legal battles

Swiss bank UBS’s struggle to throw off its past have culminated this week in legal battles on two fronts: in the US over pre-2008 issuance of mortgage securities, and in France over allegations it helped rich clients evade tax.

The US justice department on Thursday filed a lawsuit against UBS accusing the Swiss bank of causing investors to lose “many billions of dollars” on residential mortgage-backed securities that it issued in the run-up to the financial crisis.

Meanwhile, UBS dismissed as “irrational” demands by French prosecutors for it to pay a €3.7bn fine in a court case in which the Swiss bank is accused of illegally soliciting French clients and then helping them stash cash outside of the country. UBS said it had “strongly contested” the prosecutor’s demands and “any criminal liability in this case”.

The actions come as Sergio Ermotti, chief executive, seeks to assure investors he can boost growth in UBS’s core global wealth management business — including by attracting wealthy American clients.

Thomas Hallett, analyst at Keefe, Bruyette & Woods said: “UBS remains beset by its legacy issues and through its rather aggressive approach, whilst indicative of its positive stance, continues to weigh on investor sentiment. We do not see the removal of litigation overhang anytime soon.” Shares in UBS were down 2.9 per cent on Friday.

The US suit, launched under a law that allows authorities to seek civil penalties equal to investor losses, came after a breakdown in negotiations between the Department of Justice and UBS. The two sides disagreed about the size of the settlement UBS should pay, according to a person familiar with the bank’s position.

UBS, which has vowed to fight the suit, issued a release ahead of the action, saying: “The DOJ’s claims are not supported by the facts or the law.”

The DoJ’s 302-page complaint seeks damages under the Financial Institutions Reform, Recovery, and Enforcement Act (Firrea), which the US authority has used to secure tens of billions in dollars in settlements from other banks since the 2008 financial crisis.

“The filing of this complaint makes clear that we will continue to hold financial institutions fully accountable for their conduct and will aggressively pursue financial fraud,” said Richard Donoghue, the US attorney for the eastern district of New York, in a statement.

Quite possibly better than little beside leprosy

The lawsuit on Thursday alleged that investors in $41bn-worth of residential mortgage-backed securities issued by UBS “lost many billions of dollars, with substantially more in losses projected during the remaining life of the deals”.

A spokesperson for the US attorney’s office declined to say the maximum penalty it could win if it prevailed in the case, which is expected to take years unless there is a settlement.

Analysts at Keefe, Bruyette & Woods estimated the DoJ could extract a $1.8bn penalty and a further $2bn of consumer relief from UBS, adding that the bank may need to take SFr850m ($845m) of extra provisions.

UBS is one of a handful of banks to go to court to challenge a Firrea case brought by the justice department.

In 2016, the DoJ was forced to sue Barclays after it refused to settle similar allegations. Earlier this year, Barclays agreed a $2bn settlement, substantially less than the $5bn initially demanded by the government.

The largest settlement remains the $17bn Bank of America agreed to pay in 2014.

UBS has argued that it was not a “significant” originator of US residential mortgages when compared with other banks. It has also pointed to “huge losses” it made on its own investments in the US housing market. “This fact alone negates any inference that UBS engaged in an intentional fraud,” the bank said in its release on Wednesday.


Thursday, 8 November, 2018

The lawsuit on Thursday accused UBS of misrepresenting the quality of mortgages it used to back the bonds that it sold. Like in other cases, the DoJ pointed to internal comments by UBS employees.

In 2007, the head of mortgage trading at UBS called a pool of mortgages it had bought from Countrywide “a bag of shit”, according to the lawsuit.

In another example, a UBS trader allegedly said a set of loans from WMC Mortgage Corp were “quite possibly better than little beside leprosy”.

Additional reporting by Stephen Morris in London

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